Does ESG Performance Affect Corporate Credit Risk? Empirical Evidence from Electronics Industry in Taiwan

This study examines the impact of ESG policy implementation on the default probability (PD) of Taiwan’s listed electronics companies using the Kealhofer Merton Vasicek (KMV) model from 2015 to 2021. The findings show that total ESG, social, and corporate governance performance reduces PD. However, the environmental dimension’s costs exceed its benefits, making its risk reduction insignificant. Furthermore, we find that during the U.S.-China trade war, the PD of electronics companies declined, and firms that implemented ESG practices experienced a more significant reduction in default risk. In contrast, the COVID-19 pandemic has led to an increase in PD. These contrasting effects stem from the differing natures of the trade war and the pandemic. As a political and economic event, the trade war enables firms to mitigate credit risk through strategic ESG measures. Conversely, the unforeseen COVID-19 crisis makes its impact unpredictable, and additional ESG policies may increase credit risk.